Scorching-hot Latino funds could burn you

The Baltimore Sun

Investors in Latin American mutual funds have been "Livin' La Vida Loca."

That hit recording by Ricky Martin translates as living "the crazy life."

And it has been crazy: Latin American mutual funds are up 19 percent this year with a three-year annualized return of 57 percent, according to Lipper Inc.

Volatility, hype, booming commodities, currency fluctuations, rising exports and economic experimentation all have played roles in the upward momentum that continues to amaze the experts.

By comparison, the average U.S. diversified fund is up 7 percent this year with a 13 percent three-year annualized return. Emerging-markets funds, which include many booming countries, are up 11 percent this year with a three-year return of 36 percent.

"Latin American funds have managed to do well because they came off a low base after 10 years of trading sideways," said Gonzalo Pangaro, the London portfolio manager of the $2.6 billion T. Rowe Price Latin America fund. "Now most of these countries have stricter discipline that allows them to control inflation and lower interest rates."

Politics in much of Latin America have become more positive for investment. The re-election of Brazilian President Luiz Inacio Lula da Silva and election in Mexico of conservative Felipe Calderon as president last year were significant steps for those two nations that dominate the region.

While populist governments in Venezuela and Bolivia give U.S. investors pause, Chile remains investment grade and somewhat pricey, experts said. The election of Alan Garcia Perez as Peruvian president and re-election of Colombian President Alvaro Uribe Velez are seen as cause for optimism in those nations.

Peru, Brazil, Chile and Mexico have been the strongest Latin American stock markets in 2007.

"I want to be very clear there are risks in investing in Latin America, though for those with a long-term investment outlook the opportunities are still very attractive because many things have changed," Pangaro said. "But I tell investors they should not have more than 5 percent of their holdings in Latin America, because it is still a volatile region."

Despite the potential for huge swings, life has been good for investors in his T. Rowe Price Latin America fund. Its total return increased 58 percent in 2003; 38 percent in 2004; 60 percent in 2005; and 51 percent last year. It is up 18 percent this year.

Its biggest holding is Mexican telecommunications firm America Movil SAB de CV. From Brazil, industrial materials firm Campanhia Vale Do Rio Doce and energy company Petroleo Brasileiro SA are significant investments. All are available on U.S. exchanges as American depositary receipts (ADRs).

"Risks are melting away as investors realize this is a different time in Latin America, with real structural change and the likelihood valuations will go higher," said Alec Young, international equity analyst for Standard & Poor's Corp. in New York.

"Natural resources are a big part of the story, leading to budget surpluses that allow countries to retire debt and improve their fiscal positions and credit ratings."

He recommends that investors follow an indexed approach to obtain diversity, either through an exchange-traded fund or mutual fund.

An ETF he recommends is the $1.8 billion iShares S&P; Latin America 40 Index, up 19 percent this year with a three-year annualized return of 54 percent. It passively tracks 40 of the largest companies from Argentina, Brazil, Chile and Mexico, purchasing their stocks through ADRs traded in the U.S. That makes it easy for investors to see the stocks it holds, though, as with all ETFs, investors must pay a brokerage commission to buy or sell shares.

"U.S. investors will buy shares of Brazilian oil company Petrobras Energia Participaciones SA and think they own Latin America but they wind up missing the boat with a concentrated strategy that includes a handful of stocks at best," Young said.

There is also a case to be made for not investing in Latin America.

"Latin America funds are essentially narrow two-country funds, with 75 to 90 percent of assets divided between Mexico and Brazil," said William Samuel Rocco, senior analyst with Morningstar Inc. in Chicago. "The very fact that Latin America funds have been hot for so long makes me concerned, because we know that over the long run this is not sustainable and they are unlikely to do as well over the next few years."

He considers Latin America funds "one step up" from single-country funds and much riskier than a diversified emerging-market fund, which most likely will have significant holdings in Latin America.

"There is nowhere for a Latin America portfolio manager to hide if Brazil or Mexico blows up, whereas a diversified manager may have 8 to 12 percent in those markets," Rocco said. "This type of investing is only for more sophisticated investors and, even for them, I don't believe the time to buy is four years into a really strong rally."

For those still willing to take the risk the $4 billion Fidelity Latin America Fund is another strong performer, up 17 percent this year with a three-year annualized return of 55 percent. Top holdings include Brazil's Unibanco Brasileiros SA and Mexico's Cemex, also available as ADRs.

Andrew Leckey write for Tribune Media Services.

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